Health Economics, Policy and Law (2010), 5, 343–363

& Cambridge University Press 2010 doi:10.1017/S1744133110000071

Choice of providers and mutual healthcare

purchasers: can the English National Health
Service learn from the Dutch reforms?1
GWYN BEVAN*
Professor of Management Science, Department of Management, London School of Economics and Political Science,
London, UK
WYNAND P. M. M. VAN DE VEN
Professor of Health Insurance, Department of Health Policy and Management, Erasmus University Rotterdam,
Rotterdam, The Netherlands

Abstract : In the 1990s, countries experimented with two models of health

care reforms based on choice of provider and insurer. The governments of the
UK, Italy, Sweden and New Zealand introduced relatively quickly ‘internal
market’ models into their single-payer systems, to transform hierarchies into
markets by separating ‘purchasers’ from ‘providers’, and enabling ‘purchasers’
to contract selectively with competing public and private providers so that
‘money followed the patient’. This model has largely been abandoned where
it has been tried. England, however, has implemented a modified ‘internal
market’ model emphasising patient choice, which has so far had disappointing
results. In the Netherlands, it took nearly 20 years to implement successfully
the model in which enrollees choose among multiple insurers; but these
insurers have so far only realised in part their potential to contract selectively
with competing providers. The paper discusses the difficulties of implementing
these different models and what England and the Netherlands can learn from
each other. This includes exploration, as a thought experiment, of how choice
of purchaser might be introduced into the English National Health Service
based on lessons from the Netherlands.

1. Introduction
In a normal competitive insurance market (e.g. car insurance), insurers practise
experience rating and risk selection, which means that those at high risk either
pay large premiums or are uninsured. In an unregulated health insurance market,
annual premiums may range from less than h400 to more than h40,000 per
person, which in most societies is unacceptable. In Europe the solution to this

1 This paper was presented at the Autumn 2009 meeting of the European Health Policy Group.
*Correspondence to: Gwyn Bevan, Professor of Management Science, Department of Management,
London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK.
Email: R.G.Bevan@lse.ac.uk

343
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problem was to remove choice in both the Beveridge and Bismarck models. For
countries with Beveridge systems multiple insurers were replaced by a state
monopoly in a single-payer scheme and there was limited choice and no compe-
tition among providers. For countries with Bismarck models of multiple insurers
there was neither choice nor competition among the different insurers, as rules of
eligibility determined, which sickness fund or government scheme would apply to
each individual; and although patients had free choice of physician, there was no
price competition among providers.
In the 1970s, in the USA, the Federal government sought to develop the idea
of Ellwood et al. (1971) for competing integrated care organisations modelled
on the Kaiser Permanente Health Maintenance Organisation (HMO) (Starr, 1982:
393–398). Enthoven (1978) articulated this idea in his Consumer-Choice Health
Plan as a way to provide universal coverage by regulated competition in the private
sector. In the late 1980s, governments in the UK, Denmark, the Netherlands,
Sweden and New Zealand launched proposals for major reforms in health care
based on choice and markets. These reflected ideas of New Public Management
(Hood, 1995) and in particular two different models based on the ideas of
Enthoven (1978 and 1985). For the UK National Health Service (NHS), Enthoven
suggested creating non-competing HMOs to which people would be assigned based
on where they lived, which could thus avoid the problems that arise from experi-
ence rating and risk selection (Enthoven, 1985). This emerged as the original model
of an ‘internal market’, from 1991 to 1997, which transformed hierarchies into
markets by separating ‘purchasers’ from ‘providers’; and enabled purchasers to
contract selectively with competing public and private providers, with the objective
of ‘money following the patient’ (Secretaries of State for Health, Wales, Northern
Ireland and Scotland, 1989). In England, the idea of provider competition was
suspended from 1997 (Secretary of State for Health, 1997) but reintroduced with
an emphasis on patient choice from 2002 (Secretary of State for Health, 2002).
In the Netherlands, the model of choice and competition among insurers was
developed over 20 years (Ministry of Welfare, Health and Cultural Affairs, 1988),
which also allows insurers to contract selectively with competing providers.
The reforms in England and the Netherlands created new transactors,
responsible for insuring defined populations for their costs of health care,
but the markets were designed so that these transactors would not practise
experience rating: in England by virtue of these being monopolies, and in the
Netherlands by the development of a risk equalisation scheme and mandatory
community rating (with everyone paying the same premium for the same
insurance product per insurer). In the rest of this paper, we describe these
transactors generically as Mutual Healthcare Purchasers (MHPs), which
includes the sickness funds and private health insurers in the Netherlands, and
‘purchasers’ and ‘commissioners’ in England.
The second and third sections of this paper outline the experiences and progress
in implementing different models of choice and competition in England and the
 Choice of providers and mutual healthcare purchasers 345

Netherlands, and discuss the obstacles to implementing these models successfully

and the progress that has been made. The fourth section considers what each
country might learn from each other, and explores a ‘thought experiment’, of
how competition between MHPs might be introduced in England by learning from
the Dutch experience. The final section makes concluding observations on the
experience of different models of choice in the two countries.
This paper mainly considers technical, economical and political obstacles and
preconditions to implementing provider and purchaser competition in England
and the Netherlands. Analysis of how institutional context and governance logics
shape changes in governance approaches is, for the most part, beyond the scope of
this paper. Dixon et al. (2010) report a comparison of current policies in England
and the Netherlands that aim to implement choice for patients over where and
when they are seen by specialists in hospital outpatient clinics, which have been
supported by electronic referral systems. Or et al. (2010) contrast current policies
to increase patient choice of providers in three countries with the Beveridge model
(England, Denmark and Sweden) and to reduce this choice by ‘soft’ gatekeeping
in two countries with the Bismarck model (France and Germany).

2. The purchaser/provider split in England: 21 years of fruitless

endeavour?
2.1 Two models of an ‘internal market’
In 1989, prior to the introduction of the original model of an ‘internal market’ in
England, the NHS was organised into a hierarchical structure with each organi-
sation defined geographically. There were 14 Regional Health Authorities, which
were responsible for Hospital and Community Health Services (HCHS) and pri-
mary care. Beneath the regions there were nearly 200 District Health Authorities
(DHAs), responsible for meeting the needs of their populations and running the
HCHS, and 90 Family Health Service Authorities, responsible for paying general
practitioners (GPs) as independent contractors (Klein, 2007: 66–72 and 98–100).
Patients’ access to HCHS was via referral from GPs who acted as gatekeepers. The
system was designed to contain costs of HCHS by capping the global budget, and
achieve an equitable distribution of resources by funding DHAs using a weighted
capitation formula (Bevan and Robinson, 2005). This system, however, lacked
financial incentives for efficiency by providers (Enthoven, 1985). In the winter of
1988–1989, a perceived ‘financial crisis’ was produced by a combination of two
policies: constraining ‘real’ growth in total spending on HCHS and redistributing
resources between DHAs. The government’s eventual policy response to this
‘crisis’ was to introduce an ‘internal market’ (Secretaries of State for Health,
Wales, Northern Ireland and Scotland, 1989; Bevan and Robinson, 2005).
In the original model of the ‘internal market’ (1991–1997), DHAs became
purchasers and hospitals independent ‘NHS trusts’. The separation of purchasing
from provision meant that DHAs, as MHPs, would be funded equitably for their
346 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

populations and be empowered to contract selectively with NHS and private

hospitals, which could thus be funded for their performance. But DHAs mainly
used ‘block’ contracts with NHS hospitals that did not vary directly with the
numbers of patients treated, and hence created a new kind of global, incremental
budgeting for hospital services (Day and Klein 1991; Glennerster et al., 1994;
Raftery et al., 1996; Croxson, 1999), although these did develop later into
‘sophisticated block contracts’ to incorporate ranges of volumes with related
payments (Raftery et al., 1996; Croxson, 1999). This meant that ‘patients followed
the money’: that is, patients’ choices were constrained by DHAs’ contracts.
The exception to this was from the innovation with most potential where GPs
opted for various forms of GP fundholding and were free to choose providers
of diagnostic and elective care subject to managing expenditure within cash
budgets. GP fundholders were typically small-scale MHPs based on general
practices (Glennerster et al., 1994; Audit Commission, 1996; Mays and Dixon,
1996; Mays et al., 2001; Bevan and Robinson, 2005).
Since 1991, there has been continuing organisational turmoil and policy
turbulence inflicted on the NHS in England (Bevan, 2006; Klein, 2007; Audit
Commission and the Healthcare Commission, 2008). Following the 1997
election, the new Labour government rejected the idea of provider competition
and developed new organisational forms to replace DHAs and GP fundholding
(Secretary of State for Health, 1997). There are currently about 150 Primary
Care Trusts (PCTs) acting as MHPs, which contract with providers of primary
and secondary care (some run community health services). The Labour gov-
ernment announced in 2002 the current model of an ‘internal market’ that
emphasises patient choice (Secretary of State for Health, 2002). Practice-Based
Commissioning (PBC) is being developed within PCTs, with the objectives of
encouraging GPs and other primary care professionals better to manage referrals
and commission and redesign services (Audit Commission and the Healthcare
Commission, 2008). PBC has echoes of the ideas of GP fundholding except that
PBCs have only indicative budgets (unlike GP fundholders’ cash budgets).
The current ‘internal market’ introduced four innovations (Audit Commission
and the Healthcare Commission, 2008):

> An emphasis on patient choice for elective care.

> A new reimbursement system, ‘Payment by Results’ (PbR), for elective hospital
care based on standard tariffs by Health-Care Resource Groups, (the English
modification of Diagnosis-Related Groups) to ensure that ‘money does follow
the patient’ (Bevan and Robinson, 2005).
> NHS Trusts can, subject to approval and scrutiny by a new regulator, Monitor,
become NHS Foundation Trusts (FTs) and enjoy greater independence and
flexibility.
> Independent Sector Treatment Centres (ISTCs), which provide diagnostic and
elective services, were created with the objective of developing an independent
sector market that delivers value for money.
 Choice of providers and mutual healthcare purchasers 347

2.2 Obstacles to an effective ‘internal market’

Experience in the English NHS (and other countries) shows that there are nine
principal obstacles to the implementation of an effective ‘internal market’:
1. From hierarchy to market. One objective of the purchaser/provider split was to
replace hierarchical with market arrangements between autonomous purchasers
and providers. However, as all political accountability is vested in one individual
in central government, namely the Secretary of State for Health (Tuohy, 1999),
this makes it difficult for MHPs to make hard choices or for hospitals to develop
into self-governing independent bodies (Enthoven, 2000).
2. Choice of provider. In many areas, there is limited choice of providers of elective
care, and such choice is much less relevant for emergency care, disease prevention
and chronic diseases (Ham, 2008a). The government aimed to increase choice in
the current ‘internal market’ through ISTCs (Audit Commission and Healthcare
Commission, 2008).
3. Provider exit. A vital way in which normal markets deliver efficiency is by forcing
failing providers to exit the market. However, it is typically politically impossible for
Ministers to let the market determine closure of a whole hospital; or the risk of this
happening by it being destabilised by loss of contracts; and even closure of a hospital
department can be politically difficult (Tuohy, 1999; Enthoven, 2000; Ham, 2007).
4. Provider incentives. In the original ‘internal market’, block contracts meant that
there were weak provider incentives. Patient choice and PbR in the current
‘internal market’ generates financial incentives for a hospital to increase activity
where its cost is below the tariff and this applies in particular to day surgery
(Street and Maynard, 2007).
5. Purchaser incentives. It has been argued that the Achilles’ heel of attempts to
introduce selective contracting by MHPs in England is that, as MHPs do not
compete, they lack incentives to do so. (Maynard, 1994; Enthoven, 2000). The
introduction of purchaser regulation on provider costs in the original ‘internal
market’ (by the ‘Purchaser Efficiency Index’: Bevan and Robinson, 2005) and
‘World Class Commissioning’ (Ham, 2008b) alongside patient choice in the
second may be seen as attempts to remedy the lack of incentives on MHPs.
6. Effective autonomous purchasing. As demand for health care is determined in a
process of collegial decision-making by GPs and hospital doctors, this means that it is
difficult for MHPs to be effective purchasers (Tuohy, 1999; Audit Commission and
Healthcare Commission, 2008; Ham, 2008b), or for patients to drive change by
consumer choice (Audit Commission and Healthcare Commission, 2008). Even in the
USA, the evidence is that patients do not switch from poor to good hospitals
(Marshall et al., 2000; Fung et al., 2008). There have been various attempts to involve
GPs in (non-competing) MHPs in the NHS (Audit Commission, 1996; Mays et al.,
2001; Wyke et al., 2003; Audit Commission and Healthcare Commission, 2008).
7. Managing MHPs’ financial risk. MHPs have to manage financial risk with each
year’s cash allocation being fixed and determined with reference to a weighted
capitation formula. In the original model of the ‘internal market’, this could be
done by block contracts, but PbR and patient choice now limits MHPs’ scope to
manage payments to providers (Bevan and Robinson, 2005).
348 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

8. Information on prices. In the original ‘internal market’ there was scope for
competition on price but no sound basis for comparing services of different
hospitals (Enthoven, 2000). Now, for 80% of hospital services for which there is
in principle scope for competition, PbR has removed competition by price but
provided a basis for comparing hospitals.
9. Information on quality. In the original ‘internal market’ there were no comparable
good data on quality of care (Enthoven, 2000). There is now a regulator of quality,
the Care Quality Commission, which is responsible for publishing an annual
Health Check that assesses the performance of MHPs and providers against
national standards set by the government (Healthcare Commission, 2008). This
information is not, however, designed to inform patient choice in markets, so there
is still a lack of detailed timely information for patients as consumers of health
care (Audit Commission and Healthcare Commission, 2008).

2.3 Evaluations of choice and provider competition in the English NHS

Brereton and Vasoodaven (2010) have published a review of the literature on
the original and current ‘internal markets’ in which they highlight two key
evaluations: the systematic review of the original ‘internal market’ by Le Grand
et al. (1998) and the current one by the Audit Commission and Healthcare
Commission (2008). As they point out, few studies have sought to evaluate the
cumulative effects of either market-based reforms, but there is an abundance of
research on the effects of individual policies. Their findings on the original
‘internal market’ may be summarised as follows:
> DHAs lacked the ability effectively to purchase and influence providers.
> NHS Trusts increased productivity, reduced costs and post-surgical length of stay.
> GP Fundholding was associated with reductions in patient waiting times, but
there was mixed evidence of its impacts on referral rates and prescribing costs,
inconclusive evidence of its longer-term impact on costs, and concerns over
inequities between patients from fundholding and non-fundholding practices.
Detailed studies of the original ‘internal market’ were handicapped by limi-
tations of data. Data on prices were available for GP fundholders and for
hospitals treating cases from DHAs with which they did not have a contract
(Extra-Contractual Referrals – ECRs), but not for most of hospital care as this
was for contracts with DHAs for which prices were not made public (Propper
and Söderlund, 1998). There were limited data on quality. Propper et al. (2004)
sought to investigate the impact of competition on quality by using in-hospital
deaths within 30 days of emergency admission with a myocardial infarction for
patients (which they found had a small negative effect). There are two problems
with the evaluations of hospital efficiency and productivity: these use data on
episodes of care, which are vulnerable to inflation, and we lack a counterfactual.
Le Grand’s verdict on the limited impacts of the first ‘internal market’, which
remains valid in the light of later evidence, was that ‘The incentives were too
weak and the constraints were too strong’ (Le Grand, 1999: 33).
 Choice of providers and mutual healthcare purchasers 349

The principal findings of Brereton and Vasoodaven (2010) for the literature
on the current ‘internal market’ based on patient choice were that there is little
evidence of improvements that can be attributed specifically to market-based
reform, which has little support from patients and the public, and NHS staff
have been de-motivated by the succession of shifts in policy. They recognise that
it may be too soon to judge the impact of these reforms. The evaluation by the
Audit Commission and Healthcare Commission (2008) identified four reasons
for this: the development of FTs and patient choice were behind schedule, where
patients were offered choice, they lacked detailed information (Dixon et al.,
2010 highlight problems of implementing the ‘Choose and Book’ system), the
scale of ISTCs is limited, and the effectiveness of those working on commis-
sioning in PCTs has been impaired by four reorganisations since 1997. The
Audit Commission and Healthcare Commission found little hard evidence of
systemic improvements in the development of effective commissioning by PCTs
or PBC; from ISTCs or FTs; from PbR; or from the choice policy. They also
identified concerns with three of the four innovations: freeing concerns from
government control means that there is no system of governance to ensure
supply across health economies; ISTCs were offered more costly contracts than
NHS providers; and there was scepticism over the choice policy as an instrument
to drive up quality (Bevan, 2008).
A separate evaluation by the Audit Commission (2008) of PbR concluded that
this had ‘undoubtedly improved the fairness and transparency of the payment
system’ (p. 2) but has ‘yet to have a significant impact on activity and efficiency’
(p. 5) (see also Farrar et al., 2007). The review of the literature on PbR by Brereton
and Vasoodaven (2010) identified problems of the incentives it created including a
conflict with funding of PCTs, incentives for supplier-induced demand, questions
over its impact on quality of care, and disincentives to treat severely ill patients.
The principal conclusion of the review by Brereton and Vasoodaven (2010:
10) of the evidence on the impacts of both ‘internal markets’ is that ‘the reforms
have not been proven to bring about the beneficial outcomes that classical
economic theory predicts of markets’ such as provider responsiveness to patients
and purchasers; large-scale reduction in costs; and innovation in service provi-
sion (the reasons being the obstacles we identified above). Their conclusion was
that the available research on each form of the ‘internal market’ indicated that
the NHS has incurred the transaction costs of seeking to introduce competitive
markets without experiencing their benefits.

3. Consumer choice of MHP in the Netherlands

3.1 From top–down cost controls to managed competition
Historically, the Dutch health care system has been characterised by much private
initiative both in funding and provision of care, but the mix of corporatist and
350 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

etatist governance has allowed the government to intervene in various ways to

control total costs. From the mid-1970s, the government increasingly regulated
supply and price. In the 1980s, the open-ended hospital reimbursement system for
inpatient care was replaced by a budgeting system, and the government controlled
physicians’ fees and then their total revenues. However, these top–down policies
were criticised for creating a system that lacked incentives for efficiency and
innovation – similar to Enthoven’s criticisms of the NHS (Enthoven, 1985). Hence
there was broad support for incentive-based reforms and a reconsideration of the
role of competition in health care. In March 1987, the government-appointed
Dekker Committee recommended a pro-competitive health care reform, which
after 12 months of intense national debates, the government accepted (Ministry of
Welfare, Health and Cultural Affairs, 1988).
In the early 1990s, the Dutch government had effective systems for controlling
prices, the number of physicians, hospital capacity and hospital budgets, which
produced effective top–down control of total expenditure on health care:
as a percentage of gross domestic product (GDP) this barely increased over
20 years: from 7.4% in 1980 to 8.0% in 2000 (OECD, 2008). An unintended
consequence of this was unacceptably long waiting times for hospital care,
which resulted in successful legal challenges to the European Court of Justice
and Dutch courts. (Flood and Haugan, 2010, explore the issue of legal chal-
lenges to policies that seek to constrain choice.) Judgements in these courts
required sickness funds to pay for patients to be treated more quickly, which
led to an explosion in the costs of Dutch health care: expenditure on health care
as a percentage of GDP increased from 8.0% in 2000 to 9.5% in 2004 (OECD,
2008). This provided the justification for urgent reforms. After a few years of
intense political debate, the Health Insurance Act was enacted on 1 January
2006, which may be seen as the culmination of a series of pro-competitive
reforms, gradually implemented from the early 1990s, and the eventual imple-
mentation of the principles of the Dekker report. This Act introduced a package
of crucial major systemic reforms including choice among competing MHPs,
so that now:

> It is mandatory for everyone to buy private health insurance that covers the
standard benefits package as described (in terms of functions of care) in the
Health Insurance Act.
> Subsidies make health insurance affordable for everyone.
> Individual consumers have an annual choice among MHPs and among
different insurance arrangements.
> MHPs can decide to offer various insurance arrangements (such as a reduced
annual premium for a voluntary higher deductible) and different packages of
entitlements for different premiums (e.g. packages may differ in terms of the type
of primary care provider seen, the setting for types of care, whether there is direct
access to specialists or whether the GP acts as the gatekeeper, and arrangements
for paying providers). Each package of entitlements must cover the standard
 Choice of providers and mutual healthcare purchasers 351

benefits package as described in the Health Insurance Act. To protect consumers

the Health Care Authority monitors whether the contractual conditions of each
package of entitlements are in accordance with the Health Insurance Act.
> MHPs can decide to concentrate on specific population groups with entitlement
packages tailored to their specific needs (such as diabetics and the elderly) and
become skilled purchasers for their enrolled populations.
> MHPs are required to allow open enrolment and apply community rating.
> A risk equalisation fund distributes funds to the MHPs according to the
risk profile of their members and thus ensures solidarity and deters ‘cream-
skimming’.
> MHPs are allowed to contract selectively or integrate with health care providers.
> There is active and effective regulation to maintain competition.

3.2 Preconditions for effective managed competition in health care

Several complicated preconditions had to be fulfilled in order to reap the benefits
of managed competition in health care: that is, combine competition with uni-
versal access and create the appropriate incentives for consumers, providers and
MHPs. As few were fulfilled in 1987 (Schut and van de Ven, 2005), the original
timescale for such ‘radical’ reform was unrealistically optimistic. We now outline
the preconditions, the extent to which they were fulfilled in the early 1990s, in
2010 and what still needs to be done.

3.2.1 Risk equalisation

If a government tries to tackle the symptom of high premiums for high-risk
individuals by premium regulation and open enrolment, this results in ‘cream
skimming’: that is, insurers seeking only young, healthy enrolees. This problem
can be tackled effectively only by removing the incentives to do this, ideally by
risk-adjusted equalisation payments to the MHPs (van de Ven and Schut, 2007).
The risk equalisation formula does not need to be ‘perfect’, but has to be good
enough to deter ‘cream skimming’ by making MHPs’ perceived costs of risk
selection (including its loss of good reputation) outweigh its benefits.
Before 1992, the sickness funds were non-competing non-risk-bearing
administrative organisations. From 1993, the sickness funds became risk-bear-
ing MHPs and each was free to set its own premium. This revolution had to
be implemented gradually for two reasons: each MHP needed to build up
financial reserves and the risk equalisation system was initially based on age and
gender only, which left scope for ‘cream skimming’. Gradually, together with
improvements in the risk equalisation formula (van de Ven et al., 2004; Prinsze
and Van Vliet, 2007), the government increased MHPs’ financial risk from 3%
in 1993 (with the equalisation fund primarily responsible for 97% of all profits
or losses) to 75% in 2010. The Dutch government has announced further
improvements in risk equalisation that will further reduce the incentives for risk
selection and allow for a further increase in MHPs’ financial risk.
352 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

3.2.2 Market regulation

Market regulation ought ideally be by four authorities at arm’s length from
government, of which only the first was in place in the early 1990s:
> A quality authority to protect consumers against substandard quality of care:
the Netherlands Health Care Inspectorate (Inspectie voor de Gezondheidszorg).
> A solvency authority to require MHPs to have sufficient financial reserves to
fulfill their financial obligations: from 1992, De Nederlandsche Bank (DNB).
> A competition authority to prevent cartels, anti-competitive mergers and abuse
of dominant position (which were problems in the early 1990s, see Schut et al.
(1991, Tables 1 and 2): from 1998, the Netherlands Competition Authority
(NMa) covers all sectors. Ensuring competition in health care now accounts
for about a third of this regulator’s time.2
> A consumer protection authority to safeguard consumer interests3: from 2006,
the Netherlands Health Care Authority (Nederlandse Zorgautoriteit).

3.2.3 Transparency
Effective competition requires transparency in medical products and insurance.
In 1990, hospitals received a global budget and specialists were paid on a
fee-for-service basis. Transparency was improved in 2003 through a system of
combined payments for both the hospital and the specialist based on a classi-
fication system of Diagnosis Treatment Combinations (DTCs), and from 2006,
the requirement that each insurer offers insurance arrangements that cover
the standard benefits package as described in the Health Insurance Act (but
voluntary supplementary insurance is not standardised). In 2011 the number of
DTCs will be reduced from about 30,000 to 3000.
3.2.4 Consumer information
Consumers ought to be well informed about their right periodically to choose a
health insurance option and their entitlements. There ought also to be relevant,
reliable, objective and easily understandable information on the quality and services
of providers and MHPs. In 1990, there was hardly any relevant information to
enable consumers and MHPs to choose providers, and there was no consumer choice

2 Due to a change in legislation in the early 1990s sickness funds were allowed selectively to contract
with individual health care providers (GPs, specialists, dentists and physical therapists). However, in
practice nothing changed because the then existing legislation was unable to prevent providers of care
forming private cartels. In 1998, under new legislation, about 300 requests for exemption from enfor-
cement of the new Competition Act were submitted by the health care sector to the newly established
NMa. As most of these requests were dismissed by the NMa, from the early 2000s this meant most of the
old agreements on horizontal price fixing, regional cartels and entry restrictions became illegal. A path
breaking decision is the NMa’s decision against the association of general practitioners (Besluit dg NMa
van 11 April 2001, zaak 537 (Landelijke Huisartsen Vereniging)).
3 This includes actively managing the market; supervising MHPs and providers; examining whether
the information that MHPs provide to their potential enrollees is complete and truthful; examining
whether the offered insurance products are in accordance with the law; and taking responsibility for
sufficient transparency and consumer information in the market.
 Choice of providers and mutual healthcare purchasers 353

of sickness fund. From 2005, much more information is available on providers

and MHPs (e.g. http://www.kiesbeter.nl), but there is still a lack of detailed timely
accessible comparative information on quality of different types of care.

3.2.5 Freedom to contract

Insurers and providers ought to be free to contract selectively and to negotiate
the content of contracts (e.g. prices, quality and services) and to integrate
vertically. In 1990, sickness funds had to contract with any willing provider
(hospitals and physicians), were not allowed to integrate vertically with provi-
ders, and prices were fully regulated by government. From 2006, MHPs are
allowed to contract selectively or vertically integrate with providers, and prices
are negotiable for range of services (e.g. the percentage of the hospital turnover
for which the MHPs and hospitals can freely negotiate the DTC-price, increased
from 10% in 2005, to over 30% in 2009).

3.2.6 Consumer choice of MHP

Each individual consumer ought periodically (e.g. annually) to have a free choice
of MHP without facing high-transaction costs (search costs and filling out forms),
and the premium ought to be independent of age, health status or any other risk
factor. This requires MHPs to accept each applicant for each insurance arrange-
ment covering the standard benefits of basic health insurance – ‘open enrolment’ –
and not to reject high-risk applicants. In 1990, consumers had virtually neither
choice of sickness fund nor of insurance product. From 2006, they have choice of
both,4 and MHPs are required to practice open enrollment.

3.2.7 Financial incentives for efficiency

There ought to be effective financial incentives for MHPs to seek efficiency in
managing insurance and in the delivery of care through integration or contracting
with competing providers, for providers to be efficient in delivering care, and for
consumers to be price-sensitive purchasers of health insurance. In 1990, sickness
funds did not bear any financial risk, specialists received a fee for each item of
service, hospitals received a global budget, and consumers had no financial incen-
tives for efficiency. In 2010, MHPs are risk bearing and pay a lump sum payment
per episode of illness to the hospital for both hospital and physician services for
each DTC, which generates incentives for efficiency. The system is designed to
create incentives for consumers to be price-sensitive at the margin when purchasing
health insurance and a mandatory deductible has been introduced.

4 There are some obstacles when consumers want to switch MHP: subsidies from employers or ‘social
security payment’ offices can be conditional upon the purchase of a certain health insurance product; and
new MHPs may reject high-risk applicants for the supplementary insurance and the old MHP may
increase the premium of the supplementary insurance by 50% or 100% if the consumer no longer buys
the basic health insurance from this MHP.
354 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

3.2.8 Sufficient providers and MHPs

There ought to be no shortage of providers and MHPs, otherwise they will enjoy
dominant positions in the market, which limits effective competition. In addition,
the market ought to be contestable. This precondition was satisfied in 1990 and
continues to be satisfied in 2009 for MHPs, and each Dutch hospital has at least
one close substitute (Varkevisser et al., 2010).

3.3 Progress in implementing and assessment of the Dutch model

Although it is much too early for a full evaluation of the Dutch competitive model,
some preliminary conclusions can be drawn from the first evaluation of the Health
Insurance Act-2006 for the Dutch government. This evaluation was summarised
as ‘on balance positive, despite some serious problems’ (van de Ven et al., 2009).
A key indicator of the success of the Health Insurance Act-2006 is that no
political party or interest group has argued for a return to the former system
with its distinction between sickness funds and private health insurers. The
positive outcomes are: a good system of cross-subsidies (‘solidarity’); a standard
benefits package available for everyone, without health-related premium; an
annual choice of insurer/contract (major reasons for switching insurer included
the size of the premium and the premium rebate in case of group insurance
see van de Ven et al., 2009, Box 5.2); strong price competition among the
health insurers5; increasing information about price and quality of insurers and
providers of care; increasing insurers’ activities in purchasing care (e.g. setting
up their own pharmacies, owning primary care centres, experimenting with
bonus payments for GPs, and a preferred provider plan with financial incentives
to use preferred GPs, an internet pharmacy and 13 hospitals); and that the
quality of care is now at the top of the agenda.
A major achievement of the reforms so far is that in choosing an MHP and
a specific insurance arrangement each consumer receives the full savings of
choosing an efficient insurance package. This provides the MHPs with a strong
incentive for efficiency (which is absent when MHPs do not compete). So far, the
strongest impact of the reform has been on the price of outpatient prescription
drugs. In June 2008 a number of large MHPs each completed a tender among
producers of generics, which resulted in price discounts of between 40% and

5 Since 2007, the differences between the MHPs’ premiums are at most h200 per person per year, and
about 3%–4% of the population changes MHP per year. In principle these findings may either indicate
insufficient competition or effective competition among the MHPs. In the theoretical case of perfect
competition there are no premium differences and no switchers. Everybody is happy. How can one know
whether ‘small’ premium differences and a ‘small’ number of switchers indicate insufficient or effective
competition? The answer can be found by looking at the MHPs’ profits. Large profits are an indication of
insufficient competition, and small profits (or even losses) are an indication of effective competition.
Because in the period 2006–2009 the Dutch MHPs made severe losses, the above findings are an indi-
cation of effective competition among MHPs.
 Choice of providers and mutual healthcare purchasers 355

90%. These successful purchasing activities by MHPs are the more remarkable
as, in the last decade, government made many unsuccessful attempts to lower
the prices of these drugs.
However, the evaluation also found that not all preconditions are yet fulfilled
and identified some major problems.6
> Although selective contracting by MHPs is a major objective of the reforms,
this has been slow to develop for four reasons. First, the lack of good
indicators of quality of care makes it hard for the insurers to justify offering
preferred provider plans. Second, the hospital payment system is still largely
based on a global budget under government regulation. Third, other insurers
also benefit from an insurer’s managed care activities, because providers prefer
not to treat patients differently depending on their insurer. Fourth, the insurers
have still a restricted financial risk for inpatient expenses.
> Although the Dutch risk equalisation system is one of the most sophisticated in
the world, insurers still have substantial incentives for risk selection.
> In practice, the insurers’ ‘legal care duty’ is not sufficiently defined.
> The chronically ill and elderly are hindered from switching insurer because they
fear that their new insurer will not accept them for the voluntary supplementary
health insurance.
In the last 20 years, the emphasis of the reforms has been primarily on the health
insurance market. The Dutch government realises that the reform process is still a
work in progress and intends to consistently further implement the managed
competition model. Over the coming years, we expect substantial progress to be
made by the Dutch government by: further improvement of the risk equalisation
system and DTC-classification system; increasing the number of DTCs for which
the price is freely negotiable (the percentage of the hospital turnover for which the
MHPs and hospitals can freely negotiate the DTC-price, will be increased from
34% in 2010 to 50% in 2011); new legislation to strengthen further the position
and legal rights of the consumer in health care; improving the transparency of
health insurance products and better information for consumers on the quality of
care and providers per insurance product; giving hospitals full financial responsi-
bility for capital investments (buildings and medical equipment), and reducing
substantial ex-post cost-based reimbursements to MHPs. There is also scope for
further integration between MHPs and the providers of care,7 which could result
in Enthoven’s model of competing HMOs.

6 The report also identified other issues. For example, a small minority refuses to buy health insur-
ance (about 1%) or to pay premium (about 2%). And although the Health Insurance Act-2006 allows
vertical integration between insurers and providers of care, this is contentious and there is uncertainty
about its political acceptability.
7 An option could be integration between a ‘hospital/multispecialist group practice’ and GPs. For
example, such a new ‘integrated care organisation’ and a MHP might agree that for a risk-adjusted capi-
tation payment the ‘integrated-care organisation’ provides all covered care to all insured of this MHP who
are living in a specified geographical area (e.g. the hospital’s catchments area). Then this ‘integrated-care
356 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

4. Learning from each other?

So what can each country learn from each other? The story so far seems to be that
the Netherlands has succeeded in the difficult implementation of a system of MHP
competition, but that quite dramatic changes in the structure of MHPs and the
degree of competition among them have, so far, had little effect on hospitals. This
is largely because there is still substantial government regulation with respect to
prices and budgets, and although GPs act as gatekeepers to specialist care, patients
have free choice of physician (either GP or specialist). Hence the real challenge for
MHPs in the Netherlands is to be able to channel their patients to preferred GPs
and (via them, or via advice, or via financial incentives or via the insurance con-
ditions) to preferred hospitals. MHPs, however, fear that if they were to do so now,
they would be suspected of choosing hospitals on grounds of low cost and inferior
quality, and, as a consequence, would lose enrollees to MHPs that did not restrict
patient choice. Hence, although the Dutch system is now improving the infor-
mation on hospital costs, this could only be used in selective contracting if MHPs
can also use and hence produce good evidence that their selective contracting
is guided by quality. Unfortunately, such detailed information on quality of care is
not yet available.
The English NHS has made little progress in developing a system of hospital
competition despite this having been the principal objective of two different
reforms. There seem to be three principal reasons why hospital competition
has failed to develop in England: problems of provider exit; collegial decision
making by GPs and specialists; and a lack of detailed timely comparable
information on quality of care in hospitals. We emphasised above that there are
numerous reasons why provider competition has so far largely failed to develop
in England, and so introducing competition among MHPs is unlikely to have
much impact without overcoming the other obstacles. Furthermore, we now
know that competition among MHPs in the Netherlands has not yet resulted in
them being able to exploit the potential of selective contracting for hospitals.
Schlesinger (2010) highlights the complexities posed by policies seeking to
introduce choice into systems of health care and Bevan et al. (2010) distinguish
between choice being an end in itself (the evaluative reason) and as a means to
enhancing the responsiveness of governments and markets to the needs and
demands of their citizens and consumers (the effectiveness reason). We consider
here the idea of introducing choice of MHP into the English NHS as a ‘thought
experiment’ with three different sets of changes. The first is for the evaluative
reason of simply allowing the principle of choice of MHP. The other two are for

organisation’ has both the financial incentives and the tools for efficiency through integrated and coordinated
care. An interesting development, which may be a step in this direction, is the Integrated Care Programme for
Diabetes. The goal of this programme is to experiment with a new payment system for integrated diabetes
care as an instrument to stimulate the forming of multidisciplinary integrated groups of professionals in
diabetic care (see http://www.zonmw.nl/en/programmes/all-programmes/diabetes/).
 Choice of providers and mutual healthcare purchasers 357

the effectiveness reason, introducing constrained MHP competition (so that this
still looks very much like the English NHS now) and full MHP competition with
the wide range of choices of the Dutch system. We consider here the extra
requirements to implement these different models additional to those required
for effective provider competition.
Simply allowing choice of MHP would require a different method of risk
rating for populations: from using data on small areas (currently used in the
formula funding of PCTs) to data on individuals. The Department of Health has
commissioned the Nuffield Trust to develop such a method to provide guidance
in the funding of PBC (Bevan, 2009).
Constrained MHP competition would allow MHPs to offer the same package
of health care (regulated by NICE), free at the point of delivery (except for
standard national charges). MHPs would define their catchment areas (in terms
of clusters of postcodes) where they can guarantee a duty of care to the popu-
lation of that area: access to both a local GP and the same standard complete
package of community and hospital care. MHPs would be able to contract
selectively with GPs and providers of community and hospital services, which
would restrict patient choice of provider (these contracts could be based on
nationally or locally negotiated rates of pay). One natural way of enabling there
to be consumer choice of MHP would be to allow each PCT to offer to act as a
MHP for its neighbouring populations. Enthoven (1985) suggested this as a way
of introducing competition among DHAs. We agree with him, however, that
offering such opportunities to bureaucratic organisations is unlikely to result
in much change. Real competition would be more likely to emerge from two
different innovations: allowing entrepreneurial GPs and private insurers to
become MHPs. This would require a radical shift in the understanding of the
nature of choice in England from choice of provider, GP or hospital, to choice of
MHP. For England, this model suggests different modes of regulation in cities,
where there is scope for developing effective competitive markets, and rural
areas where there are local monopolies. In cities, regulators need to fight to
develop and maintain competition; and then use results from that as bench-
marks in regulating areas where there are natural monopolies. Regulators would
need to protect consumers from the adverse effects of competition in cities and
its absence in rural areas. If competition between MHPs were to develop, this
would require the same gradual approach as in the Netherlands in phasing in the
risk exposure of the MHPs and regulation of the solvency of MHPs.
Seeking to implement the Dutch model in England would mean that MHPs, in
contracting selectively with GPs and providers of community and hospital ser-
vices, are free to negotiate all relevant aspects of contracts including GPs and
hospitals (e.g. PbR would be used to define products, but not to set fixed prices)
with conditions on quality and consumer responsiveness. This would also open
up opportunities for MHPs to offer different types of standardised insurance
packages, but each MHP would be required to offer the same basic benefits
358 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

package of standardised functions of care. These would entail radical changes to

the way NHS providers are paid and would confront patients for the first time
with having to make choices over what they pay for insurance and the type of
coverage that this brings.
Of these three models of choice and competition among MHPs, the first, that
simply allows choice of MHP, seems like a natural development of the NHS in
England; the second, of constrained MHP competition, entails more radical
changes, would be more difficult to implement, and be an essential step before
implementing the model of full MHP competition as in the Netherlands. But it
may be only through that type of full competition would improvement follow
that would justify the transaction and political costs of these changes.

5. Conclusion
This paper has reviewed different models of introducing choice into health care
based on ‘internal markets’ of provider choice in England and of choice among
competing MHPs in the Netherlands, which in principle, are able to contract
selectively. The implementation of these different models has, however, so
far failed to generate a competitive market for hospitals in each country, for
different reasons, but, in the Netherlands, there is now managed competition
among MHPs. Our analyses of these changes suggest that those introducing
competition into health care must give people confidence that competition will
not make access more difficult as a consequence of hospital closures, or reduce
costs by driving down the quality of care. The first seems to have undermined
provider competition in England, and the second has meant that MHPs in the
Netherlands are wary of contracting selectively or otherwise channelling their
patients to preferred providers. Although there is a technical solution to the
second problem, by generating good comparative information on quality of
care, the first looks to be more intractable in England.
In the English system of majoritarian government (in contrast with coalition
government, subsidiarity and corporatism in the Netherlands) it is easy for there
to be a blitzkrieg in the formulation of radical policies (Wilsford, 1994), but,
Tuohy (1999) contrasted this with slow progress in implementation citing the
observation by Shock (1994) that, ‘A blitzkrieg can certainly achieve conquest
but it cannot ensure effective occupation’. In the blitzkrieg of policy formulation
of a model of an ‘internal market’ there is a vision of its effective operation in
England: bureaucrats contract to shape supply to meet needs of populations,
GPs and patients choose providers on grounds of quality; competition means
that the good providers thrive and grow, and the poor suffer and exit the
market. However, the experience suggests that Ministers are disappointed with
‘internal markets’ as implemented, as they turn out to be unresponsive and
bureaucratic; and also with alternatives, because they can never promise the
potential benefits of the vision of an effective dynamic market. This may explain
 Choice of providers and mutual healthcare purchasers 359

successive Ministers’ enthusiasms for ‘redisorganisations’ and fundamental

system reform in England every three years or so (Light, 2008). The continuing
problems after 21 years of various attempts at the model of purchaser/provider
split raises the question as to whether that model is fundamentally flawed.
The model has been abandoned in three countries in which it has been tried:
Scotland (Woods, 2001), Wales (Welsh Assembly Government, 2008) and New
Zealand (Ashton et al., 2005). There are variations in its application within
Sweden counties (Harrison and Calltorp, 2000) and Italian Regions (France,
personal communication; see also Carbone et al., 2008).
The Dutch health care system is now in transition from the old well-established
system of government supply side regulation of price and capacity, towards
managed competition (van de Ven and Schut, 2008, 2009). The revolutionary
proposals of the Dekker-plan are elegant in principle, but the process of imple-
mentation has proved to be difficult and lengthy. Nevertheless, the Dutch
experience looks much more controlled than the succession of radical shifts in
policies in England. The nature of Dutch policy formulation meant that it
has taken two decades for successive Dutch governments to work out how to
implement the necessary changes, but this also means that implementation
has been a process of evolutionary change. A clear conceptual model has, over
time, won support by all involved in health care: the government, the private
insurers, the hospitals, clinicians, the population and patients. This model is being
implemented in a gradual process of learning by doing. The idea of insurer
competition, as implemented in the Netherlands, is being developed in Germany
and Switzerland (van de Ven et al., 2007). However, after 20 years the Dutch
reform is still work in progress, because the proof of the pudding is in effective
provider competition, which is still in its infancy. As long as there is no sound
evidence that competing MHPs effectively control costs, the Dutch government
may not give up its ‘classic’ tools for cost containment, even if they interfere with
the preconditions of effective competition.
Tuohy (1999) identified Ministerial accountability in England as a funda-
mental axiom of the logic of the NHS and a serious obstacle to creating
an effective ‘internal market’. Unlike in the Netherlands, the government in
England remains responsible for the many activities of insuring, providing and
regulating health care. This results in bureaucratic conflicts between multiple
goals, which can only be resolved by Ministers, who are rowing in a 24/7 media
storm where the NHS is a reliable and constant source of bad news. In contrast,
the Dutch system of subsidiarity means that the multiplicity of activities
involved in insuring, providing and regulating health care are now dispersed
between various different agencies each with a clear goal. The Dutch Minister of
Health is better placed to reply to questions in parliament on problems in health
care that responsibility for its governance lies outside the Ministry, and can in
future, aspire to focusing on steering this complex system to achieve its public
goals of affordable, accessible and good quality care.
360 G W Y N B E VA N A N D W Y N A N D P. M . M VA N D E V E N

We have identified a number of obstacles to the development of an effective

‘internal market’ in England. We have also considered three kinds of develop-
ments: allowing choice of MHPs, introducing constrained MHP competition with
no other radical changes to the NHS; and implementing the fully competitive
Dutch model. The lesson from the Netherlands for countries interested in doing
so is that this requires a number of technically and politically complicated pre-
conditions to be fulfilled for this policy to be effective. These preconditions include
a good risk equalisation system, an effective competition policy, an adequate
system of product classification and medical pricing and transparent consumer
information on the health insurance products and on the quality of health care
providers. We end by asking two questions. First, does implementation of the
Dutch model require governance that is a mix of being corporatist and etatist and
based on the principle of subsidiarity? Second, in the early 1990s, if the different
models of competition were seen to be in a race to successful implementation, then
the English ‘internal market’ model would have been the hare, and the fully
competitive Dutch model, the tortoise. Therefore, will the verdict of history be
that, as in the fable, the tortoise won?

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